Round up of other ASIC related matters - Governance, Product, FOFA, EDR Schemes

GOVERNANCE - Prime - action against former directors of Australian Property Custodian Holdings Ltd

ASIC has commenced action against 5 former directors of Australian Property Custodian Holdings Ltd, which was and is the Responsible Entity ("RE") of the Prime Retirement and Aged Care Property Trust (the "Prime Trust").  ASIC alleges that the RE and the directors failed to act in the best interests of the members of the Prime Trust by purporting to amend the Prime Trust constitution to provide for the payment to the RE of a fee in the event that the units were listed on the ASX, and by directing the RE to pay a listing fee of approximately $33 million out of scheme assets.  Central to ASIC's action is the duty of officers of RE's to act in the best interest of the members of the scheme and to refrain from making improper use of their position as an officer to cause detriment to the members of the scheme.  The former directors include Michael Wooldridge, a former Commonwealth Government minister.  Both executive and non-executive directors are included in the proceedings.  The first hearing in the matter will be on 18 September 2012.

PRODUCT - ASIC warns about hybrids

ASIC has issued a further warning about hybrid securities, stating that some hybrids are highly risky investments.  ASIC has particularly noted that some hybrids have investment terms lasting several decades, with the time of redemption at the choice of the issuing company.  Hybrids are generally subordinated, so the holder of the hybrid security will rank behind other creditors.  A particular concern is that since some of the hybrids are issued by well-known companies, and advisers and investors are looking for what they perceive to be safer investments than ordinary shares, many consider hybrids to be appropriate.

ASIC particularly emphasises that issuers should make sure that hybrids are true to label, suggesting that it may be more appropriate for those products to be called capital notes.  ASIC also considers that hybrid securities have higher risks than most types of corporate bonds.

Licensees and advisers should be especially careful if recommending hybrids to their clients - the products are clearly in ASIC's sights.  Our experience is that even if you have paperwork showing that risks were disclosed to clients, at the time of complaint, clients will inevitably complain that they did not understand the investments, and it can be difficult to defend those complaints.

FOFA - ASIC consults on FOFA changes

ASIC has released consultation papers relating to two aspects of the FOFA changes - scaled advice (CP 183) and the best interests duty (CP 182). 

ASIC's proposed guidance in this area indicates the following:

Submissions close on 20 September 2012.

EDR SCHEMES - Cancellation of credit licence where not a member of an approved external dispute resolution scheme

In January 2012, the Credit Ombudsman Service ("COSL") membership of an Australian credit licensee was cancelled due to a failure by the licensee to renew its EDR membership.  The licensee was not then, and did not subsequently become, a member of FOS, being the only other relevant ASIC approved EDR Scheme.  ASIC cancelled the licensee's licence.  The clear lesson is that current membership of an ASIC approved EDR Scheme is a licence condition, and this matter is evidence that ASIC will not hesitate to take drastic action if this condition is not met.